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Best Practices: Basics of Real Estate Security

by Starfield & Smith

In the United States, one key difference between the various states is how real estate is treated as collateral for a loan; some states secure a loan through the use of a mortgage, while others use a deed of trust. Both mortgages and deeds of trust provide real estate security to a lender for the debt of the borrower; however, the foreclosure process under the two differs significantly. In general, when there is a mortgage, the lender must go to court to foreclose on its security, while when there is a deed of trust, the lender can take advantage of a non-judicial foreclosure. This is because under a deed of trust, at the time the loan is made, the borrower conveys title to the real estate in trust to a trustee, who holds it for the benefit of the lender, and most importantly gives the trustee the right to sell the property at a non-judicial foreclosure sale should the borrower go into default. For loans secured by a deed of trust, the process of foreclosure can be relatively short.

In contrast, mortgages are an agreement directly between the borrower and the lender, with no third party trustee involved. While a mortgage, like a deed of trust, will create a lien on the real estate, it does not have the same concept of conveyance in trust that a deed of trust has, and because of that difference, mortgages generally require the lender to enforce its lien through a judicial procedure. In order to foreclose on a defaulting borrower, the mortgage lender must follow state statutory law by filing a lawsuit in the local courts. Many states have very strict laws on how judicial foreclosures must be handled, and give the borrower many opportunities to postpone the eventual foreclosure. In addition, the borrower also has the right to appeal the judgment of foreclosure, and this can delay the process even more. Moreover, many mortgage states also give the defaulting borrower a statutory right of redemption, that is, the borrower has a period of time after the actual court order of foreclosure where it has the right to buy back, or redeem, its property. Due to the need to for the lender to foreclose through a judicial process, foreclosure under a mortgage can be relatively lengthy.

For more information regarding foreclosure processes and real estate security, please contact Joe at 215.542.7070 or at jernst@starfieldsmith.com.